'I'm trying to bridge art and commerce,' mumbled Ian Schrager in a heavy Brooklyn drawl while sipping an iced Coke in the bar of his stylish St Martin's Lane hotel in London's West End. 'I'm still looking for my masterpiece.'

The 58-year-old hotelier describes himself as 'a home-run hitter'. In other words his projects don't fiddle round the edges. They make an impact.

This is no exaggeration. It was Schrager who jointly founded and ran New York's Studio 54 which, in the Seventies, was the world's most famous nightclub and disco's holy shrine of hedonistic excess. Following a year in jail for tax evasion, he went on to redefine hotels with a blend of nightclub chic and provocative, ironic design.

Schrager, with his French partner Philippe Starck, tapped into nascent wannabe celebrity culture, created the first boutique hotels and made lobbies a place to be seen in. But today there is a big question he has to face up to: Is he past it or is there something left to bring to the party?

His business empire has hit a crossroads. His nine luxury hotels are only just emerging from serious financial difficulties. But if the Brooklyn-born law graduate can create a new genre in entertainment it would see the 58-year-old hotelier emerge triumphant as perhaps the most vivid encapsulation of style and commerce over the last 30 years.

In his first newspaper interview since his difficulties emerged, Schrager appears chastened, but has no doubt about his place in the scheme of things: 'I'm in the opportunity business. I started in hotels responding to the opportunity. When I sold Studio 54, I was given an IOU. "What have you got?" "A hotel." I took it. We traded.'

The trading shows no sign of stopping now. Schrager is gearing up for a new phase. Whether it follows the template he masterminded from his backroom at Studio 54 - the media frenzy, the celeb clientele, the smart design - is unclear. That reached a glittering lucrative climax in the manic run-up to the new millennium, when it was said that his hotel empire rang up profits of £120m.

But the party gave way to a mighty hangover. The dotcom bubble burst, planes flew into New York buildings and George Bush invaded Iraq. The hotel market has been on its knees since.

For Schrager, the pummelling was severe. Bank covenants of $355m were breached last year and his hotel in San Francisco, the Clift, filed for bankruptcy protection.

Media reports over the last year have centred on whether style gurus have tired of his creations; his space eaten away by imitators. Schrager acknowledges imitation and has a word for it: 'Schragerisation'. But he insists only a 'visionary and not a functionary' can carry it off. 'I don't mean that to sound...' Arrogant? 'It's not arrogant.'

Schrager is undoubtedly a tough nut. And he is in town to put the record straight. After a year's silence, his message is that he is back and soaking up new influences. Trips to Istanbul and Croatia are feeding the muse. Ecleticism and bohemia is where it's at, he reckons. Far harder to imitate than minimalism.

Travelling the world, Schrager is only taking on projects that take his fancy. He is working on hotel projects in New York with new design partners, John Pawson and multimedia artist Julian Schnabel. He has commissioned Herzog and De Meuron to build the first major new building in New York for years. Those who know him say he should do more in Europe. 'He doesn't realise how successful he could be there,' said one business partner.

As for financial difficulties, Schrager says they are behind him. His bank debt has been refinanced. The Clift has emerged from bankruptcy protection with 'creditors getting 100 cents in the dollar'. Its demise was 'an embarrassing mistake that should never have happened', brought on by the downturn in Silicon Valley's dotcom industry. The Clift is ringfenced from his other assets.

Now he is engaged in the sale of his two London hotels, the Sanderson and St Martin's Lane. The timing could hardly be better. The London market is on the march again after three years in the doldrums. Room occupancy rates are rising. US businessmen and tourists are returning. London is, for obvious reasons, their only European destination.

Hotels were further rejuvenated by the £750m sale of the Savoy Group by US investor Blackstone to an Irish consortium. This deal worked out at more than £1m per room. And a wall of money from overseas investors is beating a path to London to buy up trophy assets.

For more than a year, Schrager's hotel business partner, the property firm Burford, has been trying to persuade Schrager to sell his two London establishments. Last August he relented. Schrager wants £200m but associates say anything over £150m would be a result. Schrager is adamant he will retain management of the hotels. But others say he could be bought out.

He grew up in Brooklyn's East Flatbush. From good Jewish middle-class stock, his father - who was big in real estate - would have blanched at the thought of his son making a living running nightclubs.

Although if you believe rumours - always flatly denied by Schrager junior - his father was used to living near the edge, with alleged Mob connections. Both parents had died by the time Schrager was 24. They were spared the trauma of his time in jail. It was a time when life was out of control.

Studio 54 introduced the world to the purple rope, an 'in-crowd' door policy. It was where Andy Warhol, David Bowie and Mick Jagger partied and Bianca Jagger famously made her entrance on a white horse. It was also where raiding police found $1m in bin bags hidden in the club's ceiling. A further $2.5m was believed to have been 'skimmed'.

Prison hit Schrager hard. For months he was held in a maximum-security wing, rubbing shoulders with murderers. He paid inmates to keep him from harm. But prison was in a sense the making of him; he had time to develop his new hotel concept.

His colourful life belies his understated manner. But he doesn't miss a trick. 'I used to travel between Boston and New York. The Boston skirts weren't as short as in New York.'

Schrager last year flew to Iraq with US General Tommy Franks to 'be a part of history'. He believes the negative portrayal of the war by the New York Times is misguided, but he will back John Kerry when the US goes to the polls next month, citing Bush's mismanagement of the economy as his main reason.

His free time is spent with his two daughters Sophia, 10, and Ava, seven. He is divorced from his wife Rita, a former ballet dancer. 'For most of my life, business was my life. I'm 58. I had kids in my late forties. I can afford to be selfless and patient. Maybe 10 years ago I wouldn't have been like that.'

He delights in recalling how his elder daughter confessed to him that she can never pre-plan what she is going to wear because it never looks right. Schrager wears a green woollen V-neck over a white T-shirt. 'That's it. I'm the same,' he said, raising his hands like Robert de Niro's brother.

But there could be a downside to having Schrager as your dad. His simply furnished, gargantuan 4,000 sq ft apartment in Nolita, that's 'North of Little Italy', is all white, even the curtains. Make a mess at your peril.

You wonder if now, at 58, he doesn't tire of the endless demand to create hype; to ensure the kooky product not only enthralls but satisfies demanding customers. 'I will always be doing something. I need to.' Celebrity pals include Madonna, De Niro and Bowie. They best check the post for invites soon.

What they say: "The rooms are so small it's impossible for two people to have breakfast sitting together in their room. I think he brought attitude, but that's not hospitality." Leading hotel industry veteran

"He's still very excited. He's a great operator. He creates a cahcet. He's still way out on his own." Business partner